"Note: By default Silverlight Smooth Streaming will calculate video and audio bitrates for the manifest data on-the-fly by inspecting the file. If you want to instruct Wowza Server to use the bitrates in the SMIL file, add the following property to the HTTPStreams/Properties <Properties> container in [install-dir]/conf/[application]/Application.xml (be sure to get the correct <Properties> container - there are several in Application.xml). When running in this mode, Wowza will assume the video and audio system-bitrate values are for the video and audio data only:"

This setting has no effect. It appears the system-bitrate is always used. I have found the easiest way to view the switching is to burn a graphics overlay
with the bit rate of the video.

# the src filenames show what bit rate the files are
# On a high speed connection we see 500 followed by 1500 ending with the playback of the 20000
<video src="mp4:Toronto00500_DeInt.mp4" system-bitrate="635000"/>
<video src="mp4:Toronto00750_DeInt.mp4" system-bitrate="885000"/>
<video src="mp4:Toronto01000_DeInt.mp4" system-bitrate="1134000"/>
<video src="mp4:Toronto01500_DeInt.mp4" system-bitrate="1637000"/>
<video src="mp4:Toronto20000_DeInt.mp4" system-bitrate="11800000"/>

# If I swap the values and assign incorrect bit rates to the videos I see that the system is using my system-bitrate settings
# On a high speed connection we see 20000 followed by 750 ending with the playback of the 500 to the end
<video src="mp4:Toronto00500_DeInt.mp4" system-bitrate="11800000"/>
<video src="mp4:Toronto00750_DeInt.mp4" system-bitrate="1637000"/>
<video src="mp4:Toronto01000_DeInt.mp4" system-bitrate="1134000"/>
<video src="mp4:Toronto01500_DeInt.mp4" system-bitrate="885000"/>
<video src="mp4:Toronto20000_DeInt.mp4" system-bitrate="635000"/>

This tells me the system-bitrate is always used.

I am required to have a clear understanding if it is an option to not define the system-bitrate and depend on the wowza server calculating the values correctly on the fly.

In my previous testing with WMS 3.0.5 I also noticed the smoothStreamingUseSMILBitrates had no effect when added to either HTTPStream(er/s) element in Application.xml. However in my case, changing the system-bitrate in the smil to invalid values, such as "1, 2, and 3" etc.. cause different behavior than with accurate bitrates. But, I think I had faulty media in my tests.

I will investigate and get back to you when I have a useful suggestion.

Could you PM me with a download link to your media with the overlays? It would help with testing. If not, don't worry about it.